The nominee for the new European Commissioner for Economics and Financial Affairs, Taxation and Customs Union, Pierre Moscovici, has announced that he will not be pursuing a minimum corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate as part of the Common Consolidation Corporate Tax BaseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. (CCCTB) proposal.
In Moscovici’s response to the question of whether he will “… work to ensure that a sufficiently large minimum tax rate is agreed upon,” he replied:
"Differences amongst Member States result from political decisions, differences in approaches for the provision of public goods and service and national financing systems. I accept these differences. Not that some companies pay zero tax or no tax on taxable gains."
The Common Consolidation Corporate Tax Base (CCCTB) proposal was established in 2001 with a goal to harmonize corporate taxation in an increasingly integrated Europe. The ailing proposal has found new life in the shadow of the 2014 European Parliament elections, sparking debates over what should be included in the proposal.
CCCTB proposes to centralize the reporting of corporate revenue and costs in the hopes of reducing compliance costs for businesses operating in several European States. The central authority would use an apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. system to distribute corporate profits to the Member States, to be taxed at the local corporate tax rate.
Some academics and politicians have argued that a minimum corporate tax rate should be implemented to prevent a “race to the bottom” since Member States can only compete on the corporate tax rate. Others have warned that stifling tax competition could reduce growth, a major concern for a Eurozone with 11.5% unemployment.
Although Moscovici has suggested that he will leave corporate rates to the Member States, there are other worrisome provisions in the CCCTB that compromise sensitive information and could increase compliance costs. How to protect a company’s private information is still a concern, and the factors in the apportionment formula are not well defined, which could lead to costly court battles.
In addition, the mechanism by which factor definitions change as the economy of Europe changes has not been considered. Without a clear mechanism, there could be considerable adaptive inefficiencies as new products and services are developed.
For example, if technology allows a surgeon in Germany to operate on a Spanish patient with a robot, it may not be obvious where the labor is located. The legal ambiguity created from the introduction of new technology can cause problems if the mechanism is not adaptable. The CCCTB commission has not directly addressed these issues.
Given the political spotlight on corporate base erosion and profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. (BEPS) in the OECD, it understandable that politicians want to push through the CCCTB proposal. But it would behoove them to consider the details now rather than suffer the consequences later.
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